Master’s Degree
in Global Development
and Entrepreneurship
Final Thesis
On the role of oil in the growth process of
the Arab Gulf
Supervisor
Ch. Prof. Antonio Paradiso
Graduand
Sara Idda 853857
Academic Year
3
On the role of oil in the growth process of
the Arab Gulf
4
A mia mamma e mio papà, che mi hanno insegnato ad essere forte nel rialzarmi dopo ogni caduta,
ad avere il coraggio di vincere ogni sfida, dedico questo mio traguardo!
Acknowledgments
First of all, I would like to thank Professor Antonio Paradiso, the supervisor of my thesis, for his great availability and professionalism in these months of work and for always encouraging me; I also thank Prof. Silvia Vianello who has been a strong inspiration for me and a source of valuable advice.
5
Summary
Introduction ... 9
1. Macroeconomic overview with some background about countries under-study: United Arab Emirates, Saudi Arabia, Kuwait. ... 11
1.1 UNITED ARAB EMIRATES: A brief focus on the principal points deal with ... 11
1.1.1 Some background of United Arab Emirates ... 12
1.1.2 The discovery of black gold ... 13
1.1.3 From the new oil boom to the Arab revolts of 2011 ... 14
1.1.4 General political and institutional plan ... 14
1.1.5 The competitive advantage of UAE ... 15
1.1.6 Macroeconomic framework ... 16
1.1.7 Political economy ... 17
1.1.8 Sectors of opportunity: infrastructure and construction ... 19
1.1.9 Trade agreements ... 20
1.1.10 Elements that attracts investments ... 21
1.2 SAUDI ARABIA: Introductive notes ... 22
1.2.1 From the second Saudi State (1824-1891) to the founding of the Kingdom of Saudi Arabia (1932) ... 22
1.2.2 Lights and shadows on the Saudi Kingdom in the second half of the 1900s: the policies of dissent (1953-1982) ... 23
1.2.3 From wealth to austerity: the kingdoms of Fahd and 'Abd Allāh (1982-2015) ... 24
1.2.4 The pragmatism of King Salmān for Saudi Arabia ... 25
1.2.5 The rise to power of the crown prince Muḥammad Bin Salmān ... 26
1.2.6 Saudi Arabia's economic policy ... 28
1.2.7 The first oil boom (1973-1981) ... 30
1.2.8 The end of the oil boom: the 1980s ... 32
1.2.9 The economic crisis of the 1990s and the stagnation of oil prices ... 34
1.2.10 The second oil boom (2003-2007) ... 34
1.2.11 King Salmān's policy and financial risks in light of the last two-year reforms ... 35
1.3 KUWAIT: The power of a small fortress ... 37
1.3.1 Secularization process ... 37
1.3.2 Course of events from the 16th century ... 38
1.3.3 British supremacy and the advent of the oil age ... 38
6
1.3.5 1991, Gulf War ... 39
1.3.6 The Second Gulf War ... 41
1.3.7 State, institutions and generalities of the country... 42
1.3.8 Focal points of the Kuwait economy ... 43
1.3.9 Anachronistic aspects and contradictions within the cult of Kuwait ... 45
1.3.10 Succession in the Gulf, Kuwait: reforms and neutrality, the challenges of the next emir ... 46
1.4 The Islamic economic-financial model ... 49
1.4.1 The origins of Islamic finance: Sharīʿa ... 51
1.4.2 Prohibitions and duties in Islamic business ... 52
1.4.3 Al rib𝑎: prohibition of interest ... 53
1.4.4 Al gharār: prohibition of information asymmetry ... 55
1.4.5 Al maysir: the ban on gambling and speculation ... 56
1.4.6 Other prohibited residual elements ... 57
1.4.7 Al zakāt: obligation to give alms ... 57
2. SOLOW MODEL ... 59
2.1 Economic growth: the Solow model ... 59
2.1.1 Textbook’s open economy framework ... 59
2.1.1.1 Technological and demographical progress and its effects, including the demographic aspect ... 60
2.1.1.2 The steady state and the tendency to the steady state: theoretical considerations ... 61
2.1.1.3 Growth and steady state in the presence of technological progress ... 62
2.1.1.4 Savings and amortization: the accumulation of capital ... 63
2.1.1.5 The implications of the Solow’s model of convergence ... 65
2.1.2 Growth theory considering oil exports ... 69
2.1.3 Long-term output equation for oil-exporting economies ... 70
2.1.4 Summing up the above ... 70
2.2 Elaboration of the model ... 71
2.3 Simulation of model ... 73
2.4 Analysis of Regression model per country ... 77
2.4.1 Regression model of United Arab Emirates ... 78
2.4.2 Regression model of Saudi Arabia ... 80
2.4.3 Regression model of Kuwait ... 82
7
3.1 UAE forecasts: ... 84
3.1.1 “Dubai Clean Energy Strategy 2050” ... 84
3.1.2.VISION 2021 ... 86
3.1.3 EXPO 2020 ... 90
3.2 SAUDI ARABIA forecasts: ... 94
3.2.1 Vision 2030 ... 94
3.2.2 The strategy and objectives for 2020: Investing in the quality of life ... 101
3.2.3 The tax system and the listing on the stock exchange of Saudi ARAMCO ... 108
3.3 KUWAIT forecasts: ... 111
3.3.1 Vision 2035: the bold plan to transform Kuwait ... 111
Conclusions ... 114
9
Introduction
The Gulf market is one of the most prosperous markets in the global economy, mainly thanks to the presence of notable natural resources that have guaranteed a huge influx of financial income in the region. Of course, the discovery of these important resources marked a turning point for the Gulf countries and also led to a significant change from the economic and social structure of these countries. However, what probably constituted the determining element for growth was given by the set of economic policies aimed at sectoral differentiation undertaken by the governments of the various countries. Once they became aware of the exhaustion of oil resources, governments took steps to develop economic sectors that would guarantee alternative sources of revenue. The document takes into consideration three of the main countries of the Arabian Gulf: the United Arab Emirates, Saudi Arabia, and Kuwait. These countries under study are characterized by a considerable economic and commercial weight, thanks to the presence, as mentioned above, of huge energy resources, such as oil and natural gas, whose proceeds allow the country to make improvements and innovations, in all areas. In fact, since the discovery of oil in the 1960s, the sovereigns, skillfully managing and reinvesting the profits of the oil sector, have managed to transform a completely desert territory into an environment conducive to investment and characterized by an economy that is always becoming more diversified, open and liberal, and with a privileged tax regime. Over time, strong and sustainable economic growth is being promoted, and long-term restructuring and innovation plans are being implemented for the country's economic, rural and social development. It is precisely on the concept of economic growth in the countries that work is concentrated. The main objective of the thesis is to prove that trade openness is the principal indicator of economic growth, that is, that it contributes to the accumulation of capital. The first chapter of the thesis aims to analyze in-depth the historical events that led countries to be as we know them today from their birth to their explosive and pressing evolution. The historical excursus helps to understand through the oil boom that occurred in the past, the various clashes including the war in the Gulf, how these events have influenced the trend both in oil but also in the wealth and welfare of the countries. The chapter concludes with an in-depth analysis of
10
Islamic finance (Sharīʿa); after having underlined the historical features and the distinctive characteristics at the basis of this system, such as the zakāt, or the annual tax imposed on each Muslim to help the less well-off faithful, one of the five pillars of the Islamic religion to then specify the importance of the role of money within this distinct economic context, analyzing its connection with the theological as well as social sphere in which it develops. We will proceed with the observation of the main elements of prohibition related to it, which finds its main distinctive feature, but above all unusual, in the ban on ribā, or the payment of interest on any form of financing; the ban on uncertainty, gharār, and the ban on speculation, maysir. The second chapter of the work has the function of defining the subject of the thesis, through a regression model. This chapter is introduced by Solow's model which gives an interpretation of economic growth. This model provides us with the elements to formulate our growth model, which considers three important variables which are: real investments, real GDP output, and net exports. With this we want to demonstrate that the trade openness, even if it is not mathematically solvable, but it is possible to interpret it. The trade openness has favourable effects for oil-exporting countries, this contributes to the accumulation of capital, and therefore consequently to economic growth. Once the model was set up, using the Gretl program, studying the above variables, from a historical series from 1979-2014, it provided three regressions for each country of our interest. The summing-up of the section will consist of the analysis of the regressions obtained which will confirm that the trade openness focuses on oil, and therefore the export of the latter leads to additional resources for the accumulation of capital, accordingly to a growth process. The closing chapter converges on the forecasts and the various strategies that the three countries are implementing to grow, diversify and improve on all sectors. The purposes of the UAE that will be analyzed will consist Dubai Clean Energy Strategy 2050, Vision 2021 and the upcoming universal exhibition to be held in Dubai, or EXPO 2020. Subsequently, Saudi Arabia's projects will be observed, including Vision 2030, plan to achieve for 2020 and the listing of Saudi ARAMCO which debuted on the stock exchange on 11 December 2019, entering the world IPO records, with a public offer worth 25.6 billion dollars. The third chapter ends with the implementation of the "New Kuwait" reform plan (Kuwait National Development Plan
11
2035), the Kuwaiti "vision" that should lead to a diversification of the economy and a growing emancipation from the oil & gas sector.
1. Macroeconomic overview with some background about
countries under-study: United Arab Emirates, Saudi Arabia,
Kuwait.
We consider these 3 countries as they represent a cross-section of the Gulf concerning the three development phases. In third place we find Kuwait, following Saudi Arabia and in the first place, the United Arab Emirates. The latter is very advanced, middle as a population and less attached to the oil sector. We take Saudi Arabia into consideration because of its demographic component level, in fact, it is the most geographically extended part of the Arabic peninsula. Furthermore also has a lot of attachment to GDP oil. Finally, Kuwait is considered because it takes into account GDP oil and its reliance on oil for exports, in fact, 95% of oil is destined for exports.
1.1 UNITED ARAB EMIRATES: A brief focus on the principal points deal with
Approximately 50 years after independence from the United Kingdom, photography in the United Arab Emirates returns the image of an economy with one of the highest levels of development in the Middle East and with one of the highest per capita incomes in the world. The huge fossil fuel reserves have driven economic growth over the last decade. The strategic geographical position, a crossroads between Asia, Africa, and Europe, has made them a strong commercial and financial hub for foreign investors, as well as a tourist destination of great appeal. The large financial buffer available proved to be a particularly effective "defence" tool to protect the economy from adverse shocks and the degree of resistance shown during recent financial and geopolitical turmoil is a testimony. The country is also continuing its efforts to make the economy more diversified: the results are evident, for example, for Dubai, the most dynamic of the seven Emirates in this sense, which has also become a reference point for development plans in the Emirates of Ras al-Khaimah and Sharjah for the policies of attraction of private capitals necessary to finance impressive real estate
12
projects, also linked to the world of tourism. In this direction, and within a broader context, such as the Vision 2021 program, the tax and structural reforms implemented by the United Arab Emirates in recent years must be read. After a particularly weak 2017 in terms of economic growth (+ 0.8%, the lowest rate since 2009), the country's GDP has started to grow again by around 3% in 2018 and the coming years a further acceleration of economic activity (+ 3.7%, on average, in the 2019-20 period), mainly thanks to the drive for investments. On a longer horizon, on the other hand, forecasts indicate an average increase in GDP of 3.5% in the three-year period 2021-23 (IMF). Investments will benefit from the fiscal stimulus announced in May 2018 for the next three-year period which will add up to the 6 billion dollars already planned for Expo 2020 (which will be hosted by Dubai). Abu Dhabi also intends to invest 50 billion AEDs (approximately 13 billion dollars, equal to 3.5% of the UAE's GDP) for the expansion of airports and metros, as well as for the development of certain areas. Among the downside risks that could negatively affect the country's growth (especially in the non-oil sector), a weaker global economic activity, possible turbulence, and volatility in emerging markets, as well as an escalation on the side of protectionism should be considered. Furthermore, any new geopolitical tensions in the Middle East would have a negative impact on investor confidence and, consequently, on foreign investment flows in the country. Finally, new oil price shocks would have significant impacts, for an economy still influenced by this raw material despite diversification efforts. [1]
1.1.1 Some background of United Arab Emirates
The United Arab Emirates, the pearl of the Middle East on the border with Oman and Saudi Arabia, is a land of contrasts and contradictions: they represent the most modern and "western" expression in the Arab world still very much linked to the most ancient local Islamic traditions. It is a confederation of seven emirates: Abu Dhabi, Ajman, Dubai, Fujairah, Ras al-Khaimah, Sharjah and Umm al-Quwain. They gained independence from the British government in 1971, creating a single federal state and establishing Abu Dhabi as their capital. At the head of each emirate, there is a monarch, named emir, which governs directly on its territory in an absolute and hereditary manner. The President of the United Arab Emirates being elected from
13
among the seven emirs within the Supreme Federal Council and, de Iure, remains in office five years. De facto, this office is also hereditary. Today the UAE is governed by Ḫalīfa bin Zāyid’ĀlNahyān, in office since November 2004, son of the former President Zāyidbin Sulān’M ÂlNahyān. Citizens of the Arab Emirates are not allowed in any way to participate in the election of the head of state, create political parties and, even less, oppose the government. Taking advantage of the enormous wealth accumulated in the country, Šayḫ Zāyid bin Sulṭān’Ā Nahyān, first president of the UAE (in office from 1971 to 2004), he made investments in health and education and infrastructure, trying to bring the UAE on the road to rapid development.
1.1.2 The discovery of black gold
The Gulf region has always represented a real crossroads commercial (constituting an important stage of the road between West and East better known as “Silk Road”), but its importance has increased considerably with the discovery and exploitation of natural gas and oil which has been a real turning point for these countries, leading them to a completely new economic situation. The Gulf countries have passed from a rather backward economic condition to become economic powers whose resources and decision-making weight are crucial at a global level. These countries have a long commercial past behind them that has proved essential to their livelihood, considering the small agricultural resources of the area. Most countries in this region could economically rely on fishing, pearl production and pastoralism, along with economic activity related to hajj (the religious pilgrimage to Mecca and Medina), which remains important. Oil, discovered in the 1930s, began to be used massively, and on a level industrial in the 50s and 60s. Starting in the mid-1960s, as production was no longer sufficient US and European oil companies, soon began to turn to the huge oil reserves of the Gulf region, ascertained during the 1920s and 1930s by Great Britain which held the colonial dominion of the area. Thanks to the oil sector, particularly during the 2000 boom, in the GCC countries(Gulf Cooperative Council, which counts as member countries Saudi Arabia, Bahrain, United Arab Emirates, Kuwait, Oman, and Qatar) have managed to accumulate an a huge quantity of reserves, a surplus dependent on the annual variable oil price and which, despite some deficits, is still considerable.[2]
14 1.1.3 From the new oil boom to the Arab revolts of 2011
In 2002 the new oil boom broke out and there was an increase in economic growth in the MENA area, after more than a decade of stagnation. The positive climate resulting from the oil boom is not solid: economic development is linked only to external factors such as the positive trend of oil prices and tourist flows from the Gulf countries and directed towards the other Arab countries (Springborg, 2016). In “UAE Vision 2021”, launched in 2010: its goal is to bring the country to be among the best in the world for the 50th anniversary of its foundation. About this program, I will discuss later in the third chapter concerning the forecast of the country.
1.1.4 General political and institutional plan
The state religion is Islam, but freedom of worship is guaranteed by the Constitution (art. 32) if in respect of local customs. Among Muslims, the vast majority is Sunni (85%), while Shiites represent 15%. Among the other professed cults, the most widespread religions are Christianity, Buddhism, and Hinduism. The political capital is Abu Dhabi, which also represents the largest Emirate and one with the largest reserves of hydrocarbons and oil.[3] Equally important, if not greater, is the Emirate of Dubai, whose reigning house invests mainly in the tertiary sector, in trade and services, due to the decline in oil reserves. Since the 1960s, although Dubai was already beginning its commercial development, with the discovery of oil on the coast of Abu Dhabi, the real economic expansion of the country has begun.[4] Because of the political rivalries between the various Emirates, each of them maintains its independence and each ruling family implements its own strategies in the sphere of economic policy, and is responsible for the development of the aviation sector, oil, security, the finance, of its Emirate.[5] The Federal Government deals with foreign affairs, defence, education, health, financial policy, communication and telecommunications, air traffic.[3] Noteworthy is the political weight of Abu Dhabi and the economic weight of Dubai, as the decisions taken by their rulers affect all the other Emirates. At the political level, the state can be defined as a direct democracy without suffrage, as power is transmitted by inheritance.[6] Shaykh Khalifa bin Zayed al-Nahyan, a ruler of Abu
15
Dhabi, became president of the UAE Federation in 2004 and heads the Supreme Council of Governors, the highest authority in the country, which includes the rulers of the seven UAE. The Supreme Council is joined by the National Federal Council, composed of 40 native members of the UAE, elected in 2006 and 2011, which has legislative and supervisory duties and is responsible for examining all legislative proposals. These two bodies have amended the Constitution of the UAE in 1971, then made permanent in 1996. The executive body is instead the Council of Ministers and it is led by the head of ministers Sheikh Mohammad bin Rashid al Maktoum, the ruler of Dubai, is a very active figure and his approach, in the administration and in the context of the emirate, is particularly business-oriented. The Sheikh has also increased the international profile of the entire Federation, establishing stable and peaceful relations with the heads of state of other nations, especially in the West. This stability stems from several factors, which have been consolidated over time: the inheritance of political culture and social structures, the impact of oil sector revenue on the state, strong ethnic and social segmentation, the direct and indirect role of Great Britain and the United States in ensuring the status quo for the ruling families and their ability to influence the policies of the state. [6] Since their establishment, the Emirates has made considerable improvements, economically and socially, thus becoming a model to follow for the other countries of the world. This on merit to the ability of sovereigns to manage and reinvest the proceeds of oil, and to create a favourable environment to foreign investments, in line with the developments of the economy and the new economic sectors. In this regard, the President of the UAE and Governor of Abu Dhabi, Sheikh Khalifa bin Zayed al-Nahyan, confirmed his position in favour of the liberal orientation of economic policy, implementing a program of economic reforms and liberalization, also due to the effect of pressures exercised by international organizations, such as the World Trade Organization.[7]
1.1.5 The competitive advantage of UAE
The competitive advantages of the UAE Federation appear to be: the geographical position halfway between Asia and the West, the proximity to large and important natural resources, such as oil and natural gas, the presence of a cheap labour coming
16
from India and Pakistan, the presence of international companies and joint ventures in all sectors of the economy, revenues related to the tertiary sector (which represent a security for the economic development of the country), the strong strategy of diversification of the economy, the constant development of infrastructure and finally an attractive tax regime. All these positive aspects make the country one of the strongest powers in the world economy. Despite the strong economic stability of the UAE, the global economic crisis of 2008 had, even on the country's economy, negative repercussions. Indeed it has occurred a financial stalemate, cuts in oil production, the decrease in GDP and the country's exports. The most negative episode, which occurred in 2009, was the bursting of the real estate bubble, which led to the crisis of Dubai World, Dubai's main state-owned financial company. However, signs of recovery are already registered at the end of 2010, and currently, the country is characterized by a flourishing and stable economic situation.[2]
1.1.6 Macroeconomic framework
The United Arab Emirates, with their strategic geographical position at the centre of the main east-west routes and the abundant reserves of fossil fuels that have driven their economic growth, have become in less than 50 years a highly developed state with a high level of life (per capita GDP is among the highest in the world). The economy is open and dynamic, above all thanks to diversification policies that have reduced the incidence of oil revenues on the share of GDP from 60% in 1980 to the current 30%. In an economic context still characterized by strong uncertainty, the economic situation of the UAE is showing signs of recovery, after GDP in 2017 registered the lowest real growth from 2009 to today (+ 0.8%). According to IMF estimates, economic growth in the current year should reach 2.9%, to then increase further in 2019 (+3.7%), thanks to the adoption of new expansionary fiscal policies and rising oil prices and production. However, recently, downside risks to economic growth have increased and made recovery prospects less robust than expected. Firstly, the "non-hydrocarbon" sector, which should have been the main beneficiary of the increase in public spending, remains on growth values not far from those of last year (+ 2.8% against + 2.5% in 2017). Sectors such as tourism and wholesale and retail trade
17
have been progressively slowing down in recent months, with a constant compression of price margins. The rise in oil prices in the first nine months has so far had a mildly positive impact on the rest of the economy. The weakness of demand is revealed in particular by the collapse of imports in the first half of the year (-20%). As far as the oil sector is concerned, in the last few months, a progressive increase in production has been recorded, going from 2.86 million barrels per day in the first half of the year to 3.16 million in the month October. Next year's economic growth prospects are affected by: i) the possible further strengthening of the dollar; ii) the expected increase in interest rates; iii) downside risks to global oil demand growth. EXPO2020 is expected to provide new impetus to economic activity, particularly in Dubai, thanks to the number of visitors and the increase in exports and services. (will be explored it in the third chapter).[8]
1.1.7 Political economy
The degree of openness of the country shows a high propensity for a free trade regime. In general, it is freely allowed to sell directly to end-users, through a reseller; it is also possible to set up joint ventures or authorize a local company to sell its products under “franchising” contracts. According to current legislation on company law, foreign investors are not allowed to own more than 49% of the share capital: however, various sources believe that this restriction, which does not apply to Free Trade Zones, is in the process of being loose. In response to the collapse in oil prices and due to the need to make the country's economy more sustainable, the UAE has in recent years begun a process of economic diversification aimed, on the one hand, at increasing the contribution to the economy of the sector non-oil, on the other, to ensure a greater balance in fiscal policy. This theme will be deepened in the third chapter. [8]
The Gulf market is one of the most flourishing markets in the global economy, mainly due to the presence of considerable natural resources that have guaranteed a huge influx of financial income in the region. Certainly, the discovery of these important resources has marked a turning point for the Gulf countries and has also determined an important change from the point of view of the economic and social structure of these countries. However, there. which probably constituted the decisive element for
18
growth was given by the set of economic policies aimed at sectoral differentiation undertaken by the governments of the various countries. Once it became aware of the depletion of oil resources governments took action to develop economic sectors that guaranteed alternative sources of revenue and allowed the creation of new jobs, especially for the national population. Part of this strategy is also the luxury sector which, through its various sub-sectors, has greatly contributed to the economic growth of the United Arab Emirates.
“I have had many dreams. I dreamed that our country kept up with the growth of the
modern world. "
"A nation without a past is a nation without present or future.” [9]
The two sentences above, spoken by Sheikh Zayed bin Sultan al-Nahyan, guide politics and thought of the UAE, they represent synthetically one of the most characteristic aspects of the à political culture: a propensity to economic growth and modernization accompanied, for example, by the enhancement of the historical, cultural and traditional heritage of the country. As we have seen in the course of the discussion, the idealization of the Bedouin past of the Arab Emirates, of the system of values relative to this same past as well as of the characteristics of strength and spiritual resilience indicated as typical of the Bedouin tribes, have been fundamental elements in the process of construction of national identity. This past-present dualism is strongly felt by the national population, sometimes in a conflictual way, sometimes as an element that has contributed to the overall economic success of the Emirates. It is above all the government that encourages this last vision, wanting to highlight the fact that the country has reached certain goals due to the management and administration capacities of the same governmental apparatus, which inherited them from the nation's Bedouin past, together with the values that still animate every type of bond present in the Emirate society. The economic growth experienced and realized by the country determines, moreover, an association that is by now consolidated in the common imagination between the Arab Emirates, wealth and economic prosperity. This success is an indisputable fact that, as we have seen from the discussion, it also has many gray areas.
19 1.1.8 Sectors of opportunity: infrastructure and construction
Construction and infrastructure are one of the sectors that have most contributed to the development of the United Arab Emirates, contributing to the process of economic diversification of the country, which has the most advanced infrastructures in the region. From roads to ports, from airports to telecommunications, the United Arab Emirates is home to excellent infrastructures that have made business development possible. Investments of 716 billion dollars were planned and only in 2018 projects were awarded for a total value of 45 billion dollars. Most of the infrastructure projects are concentrated in Dubai and Abu Dhabi. The other Emirates, on the other hand, has a minor role, where important development plans exist, especially in Fujairah and Ras Al Khaimah (see the Economic Policy Framework section).
Strengths and weaknesses:
Among the GCC countries, the United Arab Emirates offers among the best prospects in the medium to long term, thanks to the relative greater diversification of the economy (which reduced the vulnerability to the movements in the price of oil) and to political stability. The huge availability of the sovereign wealth fund of the United Arab Emirates, the Abu Dhabi Investment Authority, makes it possible to have an important lever to respond to adverse shocks and a wide margin of procedure in economic policy decisions. The United Arab Emirates can boast a state-of-the-art infrastructure system thanks to the large investments made over the last decade. New investment plans are planned for improving roads, the railway network and airports. In recent years, progress has also been recorded in the quality of public services and the easing of bureaucracy. The 2020 Expo will provide further impetus to the country's economy thanks to the huge infrastructure investments and the positive effects on tourism. The commercial regime of the United Arab Emirates is one of the most liberal in the Gulf, with a consequent strong capacity of the country to attract foreign capital. The country's banking system is liquid and well-capitalized, and the percentage of non-performing loans (NPL) is limited (around 7%). Despite the important reforms promoted to increase the diversification of the economy, progress will take place gradually and oil price movements will continue to remain important for growth prospects. Abu Dhabi, which funds a substantial part of federal spending, is still
20
dependent on oil revenues. A collapse in oil prices would also have repercussions on the non-oil sectors due to the lower fiscal manoeuvre space for new investments and reforms. The risk profile of the United Arab Emirates depends, to a certain extent, on events that may occur across national borders. Indeed, tensions in the Middle East region affect investor confidence, as well as tourist flows, even in the United Arab Emirates (the latter already facing tensions, which however should not worsen with Iran and Qatar). The degree of commercial openness makes the country particularly exposed to other external shocks, such as the volatility of the global financial market and commercial tensions (protectionism). The anchoring of Dirham to the dollar leaves the United Arab Emirates minimal control over monetary policy and reduces the ability to counter inflationary pressures. The United Arab Emirates has limited natural resources (water and land).[10]
1.1.9 Trade agreements
In an attempt to reform and strengthen the economy, progressively integrating it with the global one, the United Arab Emirates have joined the GATT since 1994 and became members of the World Trade Organization (WTO) in 1996, applying the most nationally clause favoured to all WTO members, except for Israel. The United Arab Emirates are founding members of the GCC, the International Regional Organization composed of six states of the Persian Gulf, which established a free trade area for all products originating in the area and established a common external tariff. The GCC has concluded free trade agreements with the EFTA countries (European Free Trade Association) and Singapore. The United Arab Emirates are also signatories of the Pan-Arab Free Trade Area Agreement (PAFTA), signed by 17 Pan-Arab countries, which aims to create a free trade area through the gradual elimination of trade barriers between member countries. Looking further into the Free Zones, created in 1985, today represents one of the most successful realities in the United Arab Emirates. Some have a “generalist” nature and allow the carrying out of multiple economic and commercial activities, while others have a “specialist” nature and only provide for the possibility of carrying out certain activities (e.g. Dubai Carpet Free Zone, Dubai Auto Parts City, Dubai Flower Centre, Dubai Textile Village, Ras Al Khaimah Media Free Zone). It is
21
therefore important to carefully choose the area in which to establish the company. Settlement in a Free Zone also includes constraints because it limits the possibility of operating on the internal market: it must, therefore, be carefully evaluated if the domestic market represents the main objective of the business activity. The strong penetration of the Internet and mobile devices in the country has played an important role in fostering the growth of e-commerce. The United Arab Emirates is the largest market for online sales in the MENA area, with a total that should reach $ 16 billion in 2019 according to Fitch Solutions, far beyond the value of Saudi Arabia's e-commerce sales, although the latter's population is about three times greater. [10][11]
1.1.10 Elements that attracts investments
The United Arab Emirates is in the eleventh position out of 190 countries in the World Bank's “Doing Business 2019” ranking. What are the elements that make the difference and that favour the attraction of international capitals?
All the international indexes that put the UAE at the top of the regional competitiveness rankings start from an indisputable assumption: the Emirates are among the few realities of this area that can boast for about half a century by now a coherent and uninterrupted path of socio-economic development, of significant goals - thanks to an inimitable and fruitful synthesis of tradition and innovation - and extraordinary openness to the West. Even when the economic situation offers not particularly encouraging prospects in the short term, therefore, it is not only confidence in the solid sector that is still the driving force of oil & gas that is rewarded. At the same time, the size and quality of the ongoing economic diversification processes are highly appreciated, the invaluable value of the cutting-edge logistics and financial platform for infrastructure and efficiency that the UAE represents in the region, political stability with a very low country risk, as well as the ability to integrate and bring together over 120 different nationalities. The United Arab Emirates ranks seventh in the world for proven reserves of oil, equal to 97 billion barrels, and natural gas. Moreover, the country is also the seventh-largest producer of crude oil in the world and the revenues generated by exports contribute 30% of GDP. The Government plans to strengthen the integration between the upstream and downstream segments
22
and reduce costs by increasing the efficiency of production processes and acquiring the best know-how available on the market. [12]
1.2 SAUDI ARABIA: Introductive notes
On 21 June 2017, the king of Saudi Arabia, Salmān Bin bdAbd Al-īAzīz Al-Saʿūd, appointed his son Muḥammad Bin Salmān Al-Saʿūd, formerly Deputy Prime Minister and Minister of Defence, “crown prince” and consequently successor to the sovereignty. This caused dispossessing, the nephew Muḥammad Bin Nāyīf, who was also honoured from the offices of Minister of the Interior and President of the Council for Political and Security Affairs.[13] Muḥammad Bin Salmān is previously known on the international scene from 2017 for the presentation of the "Vision 2030" project, a reform program that aims to progressively reduce the dependence of the Saudi economy on oil revenues of which it holds about one-fifth of world reserves, which will be illustrated in deep in the third chapter.[14]
1.2.1 From the second Saudi State (1824-1891) to the founding of the Kingdom of Saudi Arabia (1932)
As regards the process of territorial unification, the campaigns of conquest in the peninsula ended in 1926, but only on 23 September 1932 the country assumed the name of the Kingdom of Saudi Arabia, an Islamic monarchy with Arabic as its national language and the Koran as its Constitution.[15] In economic matters, the first national budget of 1934 reveals that the king had to deal with a financial deficit of over 300,000 pounds[16]: the state's revenues were limited almost exclusively to the proceeds of the annual pilgrimage to Mecca. For these reasons in 1933, the king decided to sign an agreement with the American oil company Standard Oil of California (SOCAL) and to start work on oil well research in the Region under the patronage of the ARAMCO company, Arabian American Oil Company (will be explored in the third chapter).[17] Saudi Arabia welcomed numerous foreigners from the countries of the Maḡrib and Europe who lent themselves as laborers in the process of oil extraction and refining. The country's GDP grew considerably and in just over ten years, revenues rose from
23
$13.5 million to $212 million in 1952, despite economic growth being significantly halted by the Second World War.[18] From the administrative point of view, starting from 1930, all political parties were abolished. The Ministry of Foreign Affairs (entrusted to the future King Fayṣal), the Army and the Ministry of Finance were established. The latter adopted the unified Ottoman commercial code and collaborated with the Saudi Central Bank (SAMA) coining the riyāl, replacing all other coins in circulation on the peninsula. From all this it is clear that the construction of the Saudi state is the result of more than two decades of military coercion, political subjugation, struggle against opposition and stabilization of the financial economy (made possible almost exclusively thanks to the discovery of oil in the Saudi territory). These are therefore the foundations of a State that is been confirmed currently, one of the most influential world powers.
1.2.2 Lights and shadows on the Saudi Kingdom in the second half of the 1900s: the policies of dissent (1953-1982)
On the death of bdAbd Al-īAzīz Ibn Al-Saʿūd, which took place on November 9, 1953, after about half a century of rule, power passed into the hands of his firstborn, Saʿūd Bin BinAbd Al-zAzīz Al-Saʿūd. However, he inherited from his father a financial deficit that was expected to amount to about 200 million dollars [16] and was not able to manage the situation. In 1964, a coup d'état supported by the Council of ulamāʾ, forced him to abdicate in favour of his brother Faysal.
He proved to be a skilled mediator with the Western powers, but he always put the defence of the Arab countries first. The most emblematic episode was the outbreak of the crisis in the Suez Canal, in 1956 when the United States led by England, France and Israel attacked Egypt. On this occasion, the king of Saudi Arabia defended Egypt, although this could put his relations with the Western powers at risk. Support for Egyptian policies, however, was lost when Nasser began to exercise more and more power in the Country. Concerned about his appeal for the modernization and destruction of Arab monarchies, the king decided to provoke Egypt by welcoming some members of the Muslim Brotherhood, a party with a political vision of Islam, banned by Nasser who condemned them to death because they opposed his renewal
24
policy.[16] After the forced abdication of King Saʿūd Bin Abd Al-izAziz Al-Saʿūd, the sovereign Fayṣal had to deal first of all with the salvation of the state from a principle of bankruptcy, caused by the bad organization of finances by the predecessor. In economic matters, King Fayṣal imposed a statist model that favoured the nationalization of businesses and some important adjustments structural including: a clear cut in public spending, development in agriculture through five-year plans and support for the process of industrialization and youth training (encouraged young people to study in Saudi Arabia contributing to the return of many students who were at abroad) [16]. In addition, he hired foreign technical courts with skills superior to those of Saudi state officials and tried to diversify the country's economy by aiming for earnings different from those coming exclusively from the oil sector. At his death, which took place at the hands of his nephew during a public ceremony, his successor Ḵālid assumed the office of the sovereign. The new king worked on internal affairs by pursuing his predecessor's policies. In economic matters, thanks to the strict financial policies of the predecessor and the oil boom of 1973, Saudi Arabia achieved unprecedented commercial and economic growth.[16]
1.2.3 From wealth to austerity: the kingdoms of Fahd and 'Abd Allāh (1982-2015)
King Fahd committed himself to diversify the country's economy. In 1985, gas and electricity consumption reached its all-time highs, free of charge. Due to the inevitable decrease in revenues, only a few Saudis could afford some of the comforts they were used to and for all these reasons, the people will remember these years as a decade of austerity, unthinkable only a few years earlier, during the oil boom. In domestic politics, in 1992 he promulgated the “Fundamental Government System of the Kingdom of Saudi Arabia”, a Charter similar to a Constitution aimed at regulating the institutions, the economy and the jurisdiction of the country. The document has long been criticized by international media because it was drafted by a Council often accused of violating human rights. As far as education is concerned, the government-subsidized young people who decided to attend university, in an attempt to replace foreign labour, but the most coveted jobs remained those of state officials who required few academic skills.[16] In a context of crisis, between 1991 and 1992 there
25
were two petitions: one by writers and journalists asking for the creation of an Advisory Council, the equality of all men before the law, a clear improvement in the conditions of the women and total freedom of expression. The other, instead, more categorical, demanded the total change of the regime. King Fahd granted the Advisory Council in December 1993, reorganized the provincial administrations, but restored strict censorship, blocked the first attempts at women's emancipation and approved the creation of a Ministry for Islamic Affairs. For this reason, many international organizations protested against the monarchy, but the result was that the Islamic opposition, instead of shrinking, strengthened and sometimes resulted in terrorist actions led by radicalisms that proliferated in the 1990s. Upon the death of King Fahd, his half-brother ‘Abd Allāh came to the throne. His internal politics were profoundly reformist. As for the welfare system, the king granted numerous scholarships for boys and girls who wanted to study in other countries in the world; in the health field, he was the first monarch to invest in awareness campaigns and medical prevention; in the legal field, has carried out a profound restructuring of the hierarchies of power and has wished that an adequate academic training was guaranteed for the jurists. This suggests that the sovereign acted above all in the function of a project of restoration of the Saudi executive class that approached, with caution, the institutions to the religious power to preserve the conservative tradition of the Country. [19] At the death of the sovereign, the successor to the throne it was the current king Salmān.
1.2.4 The pragmatism of King Salmān for Saudi Arabia
King Salmān, now octogenarian, Emir and mayor of Riyāḍ, Minister of Defence and second deputy prime minister until he was appointed, in June 2012, the crown prince. As governor, the current monarch has worked in the Tourism Department, aiming to encourage large foreign investments (especially in the West) in the country in this sector and making use of an entourage composed mainly of scholars from the King Sa'ūd University, where numerous ministers of the nation are also trained. As Minister
26
of Defence and a member of the 1Saudi National Security Council, he distinguished
himself for his mediation skills by consolidating strong relations with the United Kingdom and the United States, but also with the great Russian power of Putin. [20] King Salmān is part of moderate reformism, although it remains linked to the Saudi political tradition.
1.2.5 The rise to power of the crown prince Muḥammad Bin Salmān
Muhammad Bin Salmān, the thirty-two years old son of King Salmān, has now taken full power and is the undisputed protagonist of a series of government actions unprecedented in the history of Saudi Arabia. He has already distinguished himself as a spokesman for national economic development programs that take the name of Vision 2030 as the crown prince of the country. An essential aspect regards the religious power in Saudi Arabia: respect for tradition by the pact stipulated at the foundation of the Saudi-Wahhabi state Saudi Arabia is the cradle of the Islamic religion because that the two holy cities are located in the country, Mecca and Medina where the Prophet was born, raised and had the Revelation of the Koran by Allah. However, the conservatism that has existed in the country, often linked to a too restrictive view of Islam, is the result of the development of a unique political tradition and the stages of the constitution of a nation that today more than ever, yes he finds himself having to mediate between the conservative spirit of some of the exponents of religious power and the need for political and economic restoration in a modern key. The prince is revolutionizing the Islam of the country through his statements that are part of the Vision 2030 program which aims to restore to Saudi Arabia the connotations that, according to him, characterized it before the advent of the Iranian revolution when the 'ayatollah Khomeini founded an Islamic theocracy. In an interview with reporter Norah O'Donnell, the prince said that his generation suffers the consequences of an agreement signed in 1979 between the ruler and the Saudi religious leadership in a moment of absolute institutional crisis when, to limit the damage resulting from the
1The Saudi National Security Council (SNSC), it was the body in charge of coordinating the national
security strategy and Saudi intelligence. It was founded in 2005 by the King ‘Abd Allāh Bin ‘Abd Al-‘Azīz Al-Sa'ūd.
27
uprising in the Great Mosque, it was decided to grant a more restrictive religious policy to reject accusations of corruption and collusion with the Western powers first among all France and the United States. The crown prince is very inspired by Saudi Arabia in the early sixties, a developing country like any other Gulf country in those years and cannot understand the fact that his ancestors allowed a circle of radical men, then still too influential, to make the nation, one of the most conservative in the world with repercussions on different sectors from the economy to the society.[21]
In October 2017, in an interview with the television channel “Al-'Arabiyya”, Prince Muḥammad Bin Salman stated that his entire policy is aimed at establishing a more moderate Islam. The reason for change this, it is because 70% of the Saudi population is composed of from young people under the age of 40, exactly like him, who do not intend to spend another thirty years of their lives struggling with the fight against extremist ideas that are the cause of the period of cultural stagnation in which the country has been living since the early 1980s. Moreover, the prince declared: “We want a normal life, which is based on the principles of our religion and our good tradition, we want to live with everyone (peacefully) and contribute to the development of our country and the whole world”.[22]
To try to shed light on the reforms concerning the “modernization” of the country, it is necessary first and foremost to analyse the causes that have blocked the opening of Saudi Arabia to date and subsequently describe the policies that, at least officially, have been undertaken to protect the country from the spread of extremist ideologies (different from the Wahhabi) since the early 1980s.[23] As regards this last point of the study, however, it is necessary to distinguish the reform program drawn up by the prince (in particular the Vision project 2030), by the measures that effectively entered into force, emphasizing that the two things are not always consistent. Muḥammad Bin Salmān has repeatedly stressed that Saudi Arabia's biggest enemy is Iran and that it is causing the cultural stagnation of its country to the developments of the 1979 Iranian revolution that brought the Shiites to power.
28 1.2.6 Saudi Arabia's economic policy
Before the discovery of oil in 1933, the Saudi state's coffers depended solely on the revenue of the annual pilgrimage to Mecca. The population consisted mainly of shepherds, farmers and small traders, poorly educated and completely isolated from the socio-economic developments of the surrounding realities. Furthermore, there is no documented use of wheeled vehicles for transport, there was no industry and the communities produced what was strictly necessary to meet their needs.[24] From the point of view of the state administration, since the foundation of the first Saudi state (1744), the sovereign periodically nominated men of power close to the royal family, who supervised the work of tax collectors in the various provinces of the Kingdom and calculated duties on imported goods and pilgrims' entrances to the country. This financial control system numbered about 400 civil servants (mainly officers and security guards) and was an archetype of what the Saudi Ministry of Finance would become in 1930. [18] According to official estimates, before 1913 the state's revenues did not exceed 100,000 pounds, ten years later they came to around 210,000 pounds [18] and after the conquest of Ḥiǧāz, already in 1927, they grew up to 1 500 000 pounds.[25] Conscious, however, the fact that these sums would never be enough to trigger a process of growth in the country, from the point of view of the infrastructures and the welfare system, for years the sovereigns continued to distribute subsidies (not quantifiable, due to the lack of registers and official sources on) to all the population, in the hope of being able to somehow safeguard a balance social and political already in itself quite unstable.[16] At the time of its establishment, in 1930, the Ministry of Foreign Affairs was almost entirely entrusted to wealthy Saudi merchants, who were in charge of controlling the internal finances of the State and to manage the first commercial relations with neighbouring countries.[26] With the implementation of a first bureaucratic system in the following years, these families were also in charge of issuing entry visas for the annual pilgrimage to Mecca and the related taxation, which however was gradually eliminated when the state treasury began to grow in such a way exponential with the beginning of oil exports, in 1948. In 1938 the discovery of oil in Saudi Arabia was not accidental it was the result of a search that resulted from various factors including the drilling in 1908 of some deposits in the nearby
north-29
western region of Persia, by the Anglo-Persian Oil Company (later renamed British Petroleum). The rise of the demand for oil during the First World War and the beginning of the Great Depression (during which the number of pilgrims fell dramatically from 100,000 to less than 40,000, with obvious repercussions on the country's financial balance sheet). For this reason, in 1933, King Sa‘ūd Bin ‘Abd Al-Azīz Al-Sa‘ūd was forced to accept the excavations by the Standard Oil of California in his territory, with the hope of finding alternative sources of income.[27] Already in 1922, a New Zealand mining engineer, Frank Holmes, was convinced that even in Saudi Arabia there should be a reserve of oil, since one had just been discovered in the waters that separate it from Bahrain and studied an agreement by submitting to the king to get authorization for the excavations. Holmes was given the concession to start work in the eastern province of the nation and turned to the United States to select an oil company that could take over the management of the excavation work. The Standard Oil of California (SOCAL) was consulted and received exploration rights on approximately 930 000 square kilometres of land for the next 60 years. SOCAL decided to set up a parallel company, the California Arabian Standard Oil Company (CASOC), which was responsible for developing the clauses of the agreements relating to that region, which would yield several million dollars shortly thereafter. In 1936, SOCAL also joined with the Texas Oil Company forming CALTEX. Initially, when the CASOC geologists examined the concession area, they identified a site that presented all the typical characteristics of the areas surrounding the deposits in other Middle Eastern areas and called it Dammam No. 7, from the name of a nearby village. The research continued for months until, almost on the verge of giving up, on 3 March 1938 the drillers arrived at oil.[28] The oil company quickly established itself among the most productive in the world and in 1943, changed its name in Arabian American Oil Company (ARAMCO) also succeeding in obtaining further concessions from the Saudi rulers. The export of Saudi oil began in 1948 and as early as 1950, given the huge profits derived from the sector, the Saudi Arabian government sought to remedy those agreements without taking into account the potential of its fields, managing to purchase the 25% of the oil company in 1973 and 60% in 1974, until, in 1980, it was nationalized and took the name of Saudi ARAMCO.[16] Regarding the economic policy of Saudi Arabia in the aftermath of the discovery of oil, the Fifties and Sixties are
30
characterized by the centralization of power in the hands of King Fayṣal who pursued a policy of state development by creating the necessary administrative and bureaucratic structures and employing state financial resources in the infrastructure sector also supported by oil revenues. The period under consideration should therefore be interpreted as a transitional period in which, given a vision of substantial change, the country still had to deal with inadequate infrastructures and the lack of qualified personnel that could initiate a real social and economic transformation.[29]
1.2.7 The first oil boom (1973-1981)
The substantial transformation discussed in the previous paragraph materialized in the early 1970s with the outbreak of the first oil boom. The first (or depending on your point of view, shock) oil boom was the consequence of the crisis triggered by the Kippur War, so-called because a coalition consisting of Egypt and Syria attacked Israel during the celebration of Yom Kippur on October 6th, 1973. During this conflict, the
Arab member countries of OPEC (the Organization of Petroleum Exporting Countries, founded in Baghdad, in 1960), including Saudi Arabia, decided to support Egypt and Syria against the United States and the other pro-Israel countries. In particular, OPEC decided to act by increasing the price of the barrel by about 11.9% and imposing an embargo against enemy countries (especially the United States and the Netherlands).[30] These dynamics had repercussions for both sides of the war. First of all, Europe had to create policies aimed at saving energy, blocking the economic development it had experienced in the 1950s and 1960s. The economic and institutional consequences for the oil-importing and non-Arab countries were also devastating. At the end of the boom, due to a severe economic crisis, some of them, like Algeria, Egypt, Tunisia, Morocco, and Jordan, were forced to adopt structural adjustment programs, imposed by the World Bank and the International Monetary Fund, in exchange of the granting of loans. It was a matter of implementing some structural measures such as the privatization of businesses and others such as the reduction of public spending and the increase in taxation, which caused serious internal conflicts because they were linked to the increase in the rate of poverty and unemployment, especially the youth one and the cuts to the welfare system that had
31
negative repercussions on the quality of health systems and education.[31] In reality, it was an economic shock even for some oil-producing countries that only at first, got rich thanks to the income of crude oil ( which came to cost more than three times the prices established before the conflict). Initially, the proceeds were used to fuel highly statist economic models, to finance the military apparatus and to expand the public administration sector. Furthermore, it was necessary to increase the state expenditure for the supply of goods whose demand had increased due to the start of the process of de-industrialization and the marginalization of agriculture.[32]
Socio-economic development led to a widespread "comfort of welfare" that transformed exporting states into rentier states, favoured authoritarianism and gave rise to the so-called "Dutch disease", an economic process that led to the slowing down of industrialization. Furthermore, there was an increase in the unemployment rate and this also had an obvious gender impact because women were forced not to work leaving the few jobs available, to men.[33] This social scenario is common to all oil-exporting countries except for Iraq, Libya, and the Gulf countries, in particular of Saudi Arabia of King Fayṣal who had invested enormously in infrastructure and even managed to launch a first economy diversification process, focusing on other resources such as steel and aluminium. [16] Before 1973, the king had repeatedly stressed that he had no intention of mixing the country's oil business and international relations, but with the outbreak of the war, these promises were disregarded. The king was the first to declare that if the United States continued to support Israel, it would opt for the embargo. Furthermore, in October of the same year, during a summit held in Kuwait, OPEC had initially decided to reduce oil production by 5% for each month of conflict and Saudi Arabia aggravated the situation by proposing and obtaining a reduction by 10%.[16] This first strategy in the conflict, led Saudi Arabia to establish itself as one of the most influential powers in the Arab world, but at the same time, it was labelled by the West as the cause of the global economic blockade. In order to safeguard the economy and security of the country, the king was forced to rethink his political strategy in the context of the conflict and the embargo and to try to get closer to the United States. In this context, Saudi Arabia was forced to return to increasing the quantities of oil extracted and therefore, the prices of crude oil fell back to almost touching the figures it was sold before the outbreak of the war.
32 1.2.8 The end of the oil boom: the 1980s
After the 1973-74 oil shock, a period of relative price stability followed. The price of oil returned, however, to increase in 1980-81 following the Iranian revolution, the war between Iran and Iraq and the signing of the Camp David agreements. The shock was brief, but its repercussions on the international scene were very serious. The price of crude oil rose to 80 dollars a barrel, creating serious supply problems for importing countries. However, after months of economic blockade, a period often described as counter-shock began, characterized by a slow decrease in demand, a constant increase in supply and the entry of new factors into the market such as the technological revolution, which interested the research, excavation and reaching the most remote fields.[34] As already mentioned, in the mid-1980s, the Middle East was affected by a serious economic crisis caused by debts accumulated after the first oil boom. The effects of the economic crisis were not slow to arrive and were manifested above all in the consolidation of the regimes, in the spread of corruption and cronyism and the support of the population to the Islamist movements, a constant up to our days.[35] Overall, world capitalism had to admit that it was now totally dependent on Middle Eastern oil reserves and therefore, also on the socio-political and economic dynamics affecting exporting states. Following the first oil boom, the West aimed at decreasing oil consumption and developing renewable energy capable of protecting countries in the event of a further oil shock. The first oil boom allowed Saudi Arabia to launch its first major national development project that resulted in the promotion of the oil and agriculture industry, and in the construction of infrastructures typical of one modern State. At this time, the private sector remains a marginal role, is present in the small production market and is part of the development of economic diversification from oil revenues.[36] In Saudi Arabia, these are years of transition managed by King Fahd who, as already mentioned, he was the proponent of the transition from years of growth and national development to a period of austerity due to the sharp drop in the price of oil which, in just six months (between January and July 1986), dropped from 26 to 8 dollars per barrel.[37] From the early 1980s, the king realized that it was absolutely essential for the country to start a process of modernization to cope with the financial deficit and excessive dependence on oil revenues. However, the internal
33
situation was complex: all the intervention projects that involved companies that were too expensive (such as the construction of a refinery in Qasīm province and an airport in the eastern region) had been abandoned and the GDP growth rate had fallen from 8.5% to 1.4% from 1985 to 1990.[16] In addition, the king wanted at all costs to avoid cuts in public spending, fearing that the population would turn against the payment of goods and services that he had always received free of charge. In a desperate attempt to increase revenue, the government announced the introduction of an income tax for foreign workers, a decision that was lifted when most of the highly qualified immigrant personnel threatened to resign. Efforts were made to circumvent the problem by imposing higher taxes on residence and exit visas, but even this policy was unsuccessful.[38] The workforce in Saudi Arabia has always played an important role given the lack of local labour. According to official data, in 1980 foreigners constituted 30% of the Saudi population and 60% of the labour force.[38] During the years of austerity (1973-1990) and especially with the oil boom, the king continued to maintain some state benefits which he thought could benefit the country's growth, like scholarships of $300 a month for students enrolled at higher education levels. However, the increase in the number of skilled young people overloaded the applications to enter a state job, the only one who could guarantee fixed salaries, as opposed to the private sector, which was already underdeveloped, but which was not able to offer the same security.[39] In general, the public administration remained the main employer, attracting over 40% of the workforce, while industry, construction and oil employed about 25%, the tertiary sector about 30% and agriculture 5% .[16] With the presentation of the fourth development plan five-year period (1985-1990), the king promoted the concept of the Saudization of the Country's resources, a program aimed also at the gradual replacement of foreign workers with qualified Saudi young people. Within the framework of these reforms, policies were also envisaged for the participation of Saudi women in the country's economy, especially in the banking sector, in the tertiary sector, in education and health care. Furthermore, there were some public investments in small women's businesses such as boutiques, sports and beauty centres especially in Riyaḍ and Ǧidda.[16] There were also debates on the possibility of granting the driving permit to women to facilitate their mobility and decrease their dependence on foreign drivers for transport, a luxury that some
34
wealthy Saudi families would have relinquished even in a period of economic crisis and increased cost of living. In this context, there was no lack of controversy among the most conservative who opposed such a modernization and fomented the intervention of the religious police.[16]
1.2.9 The economic crisis of the 1990s and the stagnation of oil prices
In general, the Nineties were characterized by ups and downs of well-being and economic crisis due to the Gulf war, from a political point of view and the 1998 Asian crisis, from a socio-economic point of view. In Saudi Arabia, oil revenues continued to be the prime source of public spending, despite government efforts to diversify the economy. The Kingdom remained, however, a rentier state. From a political point of view, the people, but also the Saudi men of power, had no interest in demanding a radical reform of the economic system, for fear that this could compromise the internal wealth of the country. Suffice it to say that, even with the fall in oil prices, there were still sufficient funds to maintain the expensive state welfare. From a social point of view, the lack of economic diversification led to a strong social inequality, the growth of the unemployment rate and the continuous increase of the foreign labour force. This socio-economic context, however, was not compatible with the objectives that the monarch had set himself: to create the conditions for Saudi Arabia to reach a competitive global economic role. The only glimmer of change came from the entrepreneurial class that, slowly, began to claim the interests of that category of workers, still too marginalized in those years compared to other Middle Eastern countries.[40]
1.2.10 The second oil boom (2003-2007)
The second oil boom that lasted from 2003 to 2007 was caused by the decline of world reserves, the increase in the consumption of crude oil in Asia and the war in Iraq in 2003. Again, the consequences were many. The oil-producing countries experienced a period of rapid economic growth, although not as during the first oil boom. Furthermore, the development of the oil sector, which is an intensive capital sector,
